Editor’s Note: One bright spot in the current economic malaise is the surprising availability of gently used time travel equipment at very reasonably prices (I practical stole my Wenger quad-lithium SRP-22 from Seth MacFarlane). While flitting about space-time, openly mocking Hawking’s chronology protection conjecture, I brought back a chapter from a 22nd century textbook titled “American Economic History – The New England to the Martian Colonies, 500 Years that Changed Everything”. Enjoy.
Chapter 13: The Great Collapse of the 21st Century
The Great Collapse, was different than the other depressions and recessions that preceded it. It was not simply market speculation, shenanigans, and bad fiscal policy (though those undoubtedly played a part), nor was it just a particularly nasty downward slope in the business cycle. Rather, it was the build-up of decades of pressure from unsustainable societal choices with respect to spending, taxation, domestic policy, and labor, combined with stunning political cowardice, that resulted in a tectonic explosion that was the Great Collapse.
What fascinates anthropologists and economic historians is that not only were the warning signs visible well in advance of the Great Collapse, they were widely recognized. Many prominent economists, academics, policy experts, and thinkers of the day beseeched the government and the public at large to embrace the economic, social, and publicly policy changes necessary to avert certain economic ruin. Unlike Galileo and Copernicus, these men and women were not thrown into prison or ridiculed; indeed several were generally well received by their contemporaries and the trade and popular press of the day. Instead, their warnings and advice were simply overwhelmed. Overwhelmed by fear and denial, by profoundly intellectual lazy populist rhetoric, and by inertia and not-so-blissful ignorance.
With the benefit of hindsight, one is tempted to chalk up the Great Collapse to simply the collapse of common sense. However, unlike the first American Civil War that had a single, clear, unambiguous cause (slavery), the catalyst of the Great Collapse was the reaction of economic and policy decisions with rapid social and technological change. Seeing the events in their historical context, perhaps we can better comprehend why early 21st century America appeared to opt for economic failure. If we hope to summon the wisdom and discipline to respond thoughtfully to emerging risks to our own economic security and stability, we should endeavor to gain a better understanding of the challenges and failures of our forbearers.
In the remainder of Chapter 13, we will introduce some key drivers of the Great Collapse, which will be discussed in greater detail in Chapters 14-21.
The Growth of Debt
American sovereign and personal debt was the albatross that ultimately sank the US economy into the Great Collapse that plunged the nation into economic purgatory for nearly one-quarter of the 21st century. The roots of the debt problem stretched back to the last quarter of the 20th century.
At the end of World War II in 1945, American veterans fighting under ghastly conditions returned to families that had spent years living in an economy where several staples including meat, coffee, gasoline, and shoes were rationed, and some goods, such as automobile tires, were virtually unavailable. Understandably, the result of this tremendous pent-up demand was a boom in consumer spending.
The reverberation would prove louder than the boom.
The last 50 years of the 20th century saw greater technological advancement than the preceding 950 years of the millennium. This spawned, for a society unaccustomed to such rapid change, a veritable explosion of new products and services, large and small, available for purchase. Overwhelmed with availability and choice, consumption became almost a compulsion, and with access to easy credit, personal debt soared.
Debt as percent of earned income was less than 50% in the 1950s and the savings rate was at 8.5%. By 1990, debt-to-income had doubled to 100%. It hit 150% in 2004 and 175% in 2009 while the savings rate fell to effectively 0%. Debt-to-income reached 200% in 2015, and, exacerbated by a decade of high unemployment, peaked at 250% in 2020.
The “Great Spend”, which began reasonably enough with the lifting of rations at the end of WWII, did not end until the second decade of the 21st century when it imploded in the Great Collapse. The economic and social implications are discussed more thoroughly in chapter 14.
Though the capital demands on a government are clearly much different than those of its citizens, the arc of government debt accumulation followed very closely that of the consumer. After declining steeply from its World War II high (when 1 in 8 U.S. citizens were serving in the military) to a low of 33% in 1979, national debt as a percentage of GDP rose steadily to 100% in 2011, before topping out at 118% in 2018.
The two sections below introduce some of the major foreign and domestic policy initiatives that contributed to the increase in government debt. Chapters 15, 16, and 18 will provide slightly less superficial overview of nearly 75 years of government spending drivers.
Foreign Policy Initiatives
Post World War II saw the United States embark on the Marshall Plan, an ambitious campaign to rebuild war-torn Europe and thwart communism from taking root on the continent. This marked the start of the “Cold War” with the Soviet Union – a confederation of Eastern European, Baltic, and Asian states – and cemented America’s role as global policeman and chief economic benefactor, a role it continued to play even after Western democracies flourished.
All foreign policy (and many domestic policy) decisions were made against this Cold War backdrop. When the Soviet Union dissolved in 1991, America’s respite from enforcer was brief, as new threats from Islamic terrorist organizations not clearly aligned with a single state or government brought new, and now armed, conflicts. As battles in the Middle East and Africa entered their second decade, U.S. foreign policy became more circumspect as it finally relinquished its role as democracy’s sole protector and benefactor.
At home, new “Great Society” programs aimed at helping the plight of the poor and elderly were launched in the 1960s, while other programs created in the aftermath of the Great Depression were expanded. As will be discussed in Chapter 16, the exponential growth of two programs – Social Security and Medicare – contributed mightily to the federal government’s debt burden.
In 1970, federal expenditures on Social Security and Medicare were $30 billion and $6 billion, respectively. They skyrocketed to $707 billion and $452 billion (2,200% and 7,200% increases, respectively) in 2010. By 2015, 1 in every 2 dollars spent by the federal government went to those two programs, and by 2020, Social Security, Medicare, and interest on the national debt accounted for 75% of all government expenditures.
While Social Security and Medicare represented the largest government outlays prior to the Great Collapse, these programs were neither the cause in and of themselves nor the government’s only miscues. (Note: see “Extending Social Security’s Early Retirement Age”)
One cause of the huge run-up of personal debt (and the corresponding cessation of personal savings) was tax policy. Prior to 2032 federal tax was not collected on the purchase of goods and services, but instead assessed against income and reported to the government each year. With a few exceptions, income and gains from investments were included in the tax. In the early 21st century, the field of behavioral economics was still in its infancy, though a few prominent economists (notably Laurence Kotlikoff and David Tuerck) championed a consumption tax to encourage saving and dissuade excessive spending. It took decades for Congress to implement the plan.
The reluctance to embrace a consumption tax appears baffling when one considers the inefficiency of the income-based collection system.
After the 16th Amendment to the Constitution was ratified in 1913 resolving the constitutionality of a direct federal tax, the entire income tax code was about 400 pages and instructions for completing the tax forms were detailed on a single page. The tax code increased an average of 800 pages a year and by 2010, it had ballooned to 75,000 pages, with 175 pages of instructions. This complexity gave rise to an industry; millions of people were employed by individuals and businesses to stay on top of the constantly changing rules and to figure out ways to minimize their clients’ tax bills. The federal government employed up to 150,000 people to process and investigate returns.
The result, of course, was tens of billions of dollars of waste each year in compliance and enforcement costs, tax avoidance schemes, and the inefficient deployment of capital. Far worse, because the policy failed to incent savings, it exacerbated consumers’ “present bias” – discounting future needs and elevating present wants – resulting in highly indebted consumers who vastly under-saved for retirement. As discussed in Chapter 17, this ultimately reduced consumers’ incomes, reduced government revenues, and increased burdens on already over-stressed social welfare programs.
Tightening Business Cycles and Domestic Policy Responses
Capitalism is characterized by “creative destruction”; a term popularized by 20th century economist Joseph Schumpeter to describe the cycle of economic innovation that sees new business models rise out of the destruction of those that came before it. As the rate of technological change hit a big inflection point in the last half of the 20th century speeding up and shortening these cycles, a major input to the “creative” part of the cycle became increasingly scarce until the innovation machine finally stalled in the early part of the 21st century. That input was an educated and energized workforce.
Rapid technological change ushered in huge productivity gains. In the last half of the 20th century, the manufacturing and industrial sectors saw the largest productivity increases and began the steady march toward a slimmer workforce. At the turn of the 21st century these gains began to be felt meaningfully for the first time in the larger “white collar” sectors of the economy. As these gains accelerated, college-educated workers accustomed to relatively well-paying jobs as cogs in large corporate machines, could not find work. Put bluntly, the new economy needed fewer worker bees.
For the cycle of innovation and expansion to continue, a steady supply of smart and highly skilled workers become the single critical input. The United States had two options for obtaining this resource: 1) grow our own (invest in education); or 2) import from elsewhere (encourage immigration). America did neither.
The American education system in the early 21st century was a study in contrasts. The United States did an exceptional job of educating the top 1%. So much so, the best and brightest from around the world were routinely sent to the United States for “finishing.”
For the rest of the population, those not born exceptionally gifted and into families that had the resources and diligence to cultivate those gifts, it was another matter entirely. The mean product of the United States educational system consistently ranked at the bottom of those from the developed world.
Some of education’s structural problems discussed in Chapter 19 include:
- Outside of a federal testing mandate (discussed below) there were no clearly articulated educational objectives and strategies at the national level. There was no organized effort to facilitate the sharing of best practices among educators. This lack of infrastructure was particularly detrimental to efforts for broad proficiency gains in historically difficult to teach subjects including higher mathematics and the sciences.
- A federal mandate required that schools receiving federal funds test students annually. States were allowed to come up with their own tests and their own standards. To ensure performance goals were hit and schools stayed eligible for federal dollars, curriculum was developed with the primary purpose of preparing students for these tests. “Teaching to the test” did improve test scores, but later studies showed it did so at the expense of critical reasoning, comprehension, and writing skills.
- Educators below the university level were not treated as “professionals”. In addition to chronically lacking resources, they were generally neither given the freedom to experiment meaningfully with teaching methods and subject matter, nor were they held accountable (or rewarded) for their results.
- There was little engagement of the private sector to create curriculum that would develop skills employers valued.
- A four-year college degree went from being a credential earned by above average students who wanted to further their studies, to a must-have punch on a ticket if one hoped for economic prosperity. The dearth of post-secondary alternatives to learn marketable skills meant students not suited to universities muddled through, gaining little, or dropped out. Employers, desperate for highly skilled labor, were forced to look abroad.
For the first part of the 21st century, immigration policy was not focused on attracting highly skilled workers from abroad. The major policy debate focused on low-skilled workers who entered this country illegally (11 million by 2010), primarily from Mexico. Some argued that illegal immigration was holding down wages and reducing job opportunities for American citizens and that the demand they placed on social services, primarily healthcare and education, was simply too great. Others argued illegal immigrants were only performing jobs American citizens deemed beneath them, and that most were law abiding, productive members of society that should be allowed to remain in the country. It was politically, and at times emotionally, charged debate that ignored the more critical issue entirely.
Since student visas (F visas) were relatively easy to obtain and there were no limits or quotas, America’s universities educated hundreds of thousands of the brightest students from around the world each year. However, staying in the country and working once studies were completed meant getting a work visa, typically an H-1B visa. These visas were capped at 65,000 in most years and foreign graduates from American universities had to compete with other foreign-born workers. The ironic outcome of these policies is that United States led the world in exporting the most highly educated, in-demand workers.
Another criticism of the H-1B program is that many large employers used it for “domestic off-shoring.” At the turn of the 21st century, companies began exporting increasingly technical and skilled jobs off shore. While the labor cost savings were significant, many companies found the challenges of managing foreign workers half a world away presented additional business challenges that offset much of that savings. Some companies specialized is securing H-1B status for large numbers of IT workers (particularly from India and Pakistan) that were then “rented” to large employers to serve as “consultants”. If these “consultants” were dismissed from their job, they had to find another H-1B opportunity (highly unlikely) or go back to their home country. This depressed wages in some slices of the IT sector for all workers, and led to what some referred to as a new period of “indentured servitude.”
Labor market dichotomy
The high unemployment that accompanied the 2008 recession and its aftermath obscured the need to bring more skilled workers to our shores. On the face of it, encouraging the additional immigration of skilled workers seemed foolish – if 10% of our citizens were unemployed, why would we possibly want to bring in more skilled workers to compete for scarce jobs?
Most economists and business leaders (though few politicians) recognized that the labor market is not homogeneous. While it was true 10% of the population was unemployed (and another 10% underemployed), many of those were either unskilled workers or workers whose skills were no longer in demand in the rapidly changing economy. Employers in many industries, high-tech manufacturing and engineering in particularly, could not find enough qualified employees in the United States, despite double-digit unemployment.
So they left. Generally, companies did not leave America altogether, but the focus of expansion was clearly international. Between 2010 and 2020, for every new engineering job created in the United States, 114 were created elsewhere. As growth in the “innovation industries” stalled domestically, unemployment rose in every sector of the U.S. economy outside of healthcare. It was not until the United States moved to a point-based (and quota-free) immigration system in 2022, did Washington heed the message that to create economic opportunities for everyone in the United States, there needed to be a critical mass of “smart people” working and living in America to grow the pie for everyone.
In retrospect, courting educated foreigners should have been done decades earlier. Here’s what might have happened had the United States overhauled its immigration system at the turn of the 21st century:
- Companies leading the “innovation industries” would have taken firmer root domestically, increasing employment across the board.
- The reduction in unemployment aid to native-born workers plus the increase in tax receipts from their gainful employment would have amounted to a savings of $800 billion to $1.2 trillion from 2010 to 2020 at the federal level alone.
- Millions of additional highly paid foreign-born workers would have further increased the revenue base, helping to shore up ailing domestic programs (Social Security and Medicare).
- An influx of highly educated foreign-born workers would have put increased pressure on education overhaul (not meaningfully enacted until the “National Education Reform Act of 2024), further improving America’s global competitiveness.
When the doors were finally thrown open in 2022, the expected stampede to our shores was more of mosey. America was no longer the only “Shining City upon a Hill”; dozens of countries afforded the individuals the opportunities for success that America once held as unique. After decades of pushing away talent, America was now in a dogfight.
Enabling all of this, either actively or through neglect, was the political establishment.
Early in the century, national politics was still dominated by two political parties; Democratic and Republican. Polemic attacks by both sides against the other passed for political discourse, while few viable strategies for addressing the anchors’ drag on national prosperity were proposed, much less implemented.
This dysfunction was exacerbated by two noteworthy allowances in the election process:
- There were no term limits for the federal legislature. It was not uncommon for members of Congress to stay in their posts 20, 30, even 40 years or more.
- While explicit bribes were prohibited, individuals and special interest groups could make “campaign contributions” to candidates. Gifts to politicians were often organized by special “political action committees” (PACs). In 2010 new kinds of PACs were permitted to raise unlimited sums from anonymous donors that could freely be spent on behalf of their candidates.
The results of the system were predictable. Politicians avoided issues that would profoundly affect a large swathe of the electorate for fear of alienating any group that might upset their bid to continue on in their offices indefinitely. When confronted with such issues, they might offer hollow legislation, or better still, wait for the other side to do so instead, so it could be blasted as politically motivated and thus, unworthy of consideration.
Special interest groups of all stripes were able to purchase access to pursue issues in their narrow self-interest. Since the cost of the benefits that accrued to these few were borne by a much greater number of people, any opposition to these measures was not nearly as invested, emotionally or monetarily, as its proponents.
Decades of ignoring issues critical to the future of most while catering to the interests of a few could not sustain forever. The two-party political system, unchallenged since the 1850s, began to crack in the second decade of the century. It was only with the election of the nation’s first politically unaffiliated president did Washington begin to grapple in earnest with the enormity of the issues weighing on the economy and society more broadly. As difficult decisions began to be made, America set out on its long, slow climb back to prosperity.